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Proskauer’s Study Examines 2017 IPOs

Proskauer’s Global Capital Markets Group has released its fifth annual IPO Study, which offers comprehensive analyses of U.S.-listed initial public offerings that priced in 2017 and identification of IPO trends over a four-year period.

The study examines data from 86 IPOs that priced in 2017 with a minimum initial base deal size of $50 million, and includes industry analyses on the health care; technology, media & telecommunications (TMT); energy & power; financial services; industrials and consumer/retail sectors. The study also includes a focus on foreign private issuers.

Utilizing proprietary information from more than 462 IPOs that the group has analyzed over the last five years, the study provides detailed comparisons of deal structures and terms, SEC comments and timing, financial profiles, accounting disclosures, corporate governance and deal expenses.

The 2017 IPO Market

Increase in base deal size

Reversing a two-year trend, we saw an increase
in the average and median base deal size. In 2017, the average base deal size was $285 million and the median base deal size was $141 million, compared
to $214 million and $116 million in 2016, respectively. Driving these increases was a decrease in the percentage of smaller deals (between $50 million and $100 million in base deal size) relative to the overall IPO market in 2017 as compared to 2016. While
there was a decrease in the number and percentage of mega deals (deals over $1 billion base deal size), there was an increase in the number and percentage of deals within the $250 million and $1 billion range.

Geographic Trends

On a global level, 2017 was the most active year for IPOs by Chinese issuers since 2014. Eight percent
of IPOs in our study were from China, which is the highest percentage in the last five years. Chinese issuers were most common in the Technology, Media and Telecommunications (TMT) and consumer/retail sectors. In addition, we saw a number of IPOs from Brazil in 2017. These are the first Brazilian IPOs in the last five years. Domestically, issuers headquartered
in California, Massachusetts, Texas and New York comprised over half of the IPOs in our study. Issuers from California and Massachusetts were most common in the health care and TMT sectors, issuers from Texas were most common in the E&P and financial services sectors, and issuers from New York were most common in the TMT and financial services sectors.

Continued increase in market acceptance of less financial information

Over the last five years, we have observed greater market acceptance of less financial information from emerging growth companies (EGCs). In 2017, five years after the passage of the JOBS Act, 70% of EGCs included two rather than three years of audited financial statements (a 32% increase since

2013) and 56% of EGCs included only two years
of selected financial statements (a 21% increase since 2013). Only 4% of EGCs included five years
of selected financial statements in 2017, compared to 29% in 2013. In addition, pursuant to the FAST Act, which became effective in late 2015, EGCs are permitted to omit audited financial statements in initial submissions for prior year(s) that would not be required in the prospectus at pricing. We observed that 12% of EGCs included one year of audited financial statements in their initial draft registration statement, up from six percent in 2016. In August 2017, the SEC provided updated guidance on this relief and significantly clarified and expanded its meaning and scope. One change resulting from

the updated guidance is that now non-EGCs may benefit from not having to include certain financial statements in draft registration statements. We expect that (due, in part, to the updated guidance) more issuers will begin to take greater advantage of this accommodation in 2018.

Shortened time to pricing ...

Outside of 2014, IPOs in 2017 had the fastest time from the first confidential submission or filing with the SEC to pricing; the average number of days
to pricing was 135 and the median was 103. This is down significantly from 2016, during which period the average time that it took issuers from first submission/filing to pricing was 220 days.

On average, IPO issuers that made a confidential submission publicly filed 105 days after their first confidential submission and priced 33 days after their first public filing.

... and decrease in SEC comments

We observed a decrease in the average and median number of SEC comments in the first comment letter. Since 2014, there has been a 41% decrease in the average number of first-round comments and 37% decrease in the median number of comments. While part of the decrease can be attributed to issuers receiving fewer boilerplate comments relating to general process requirements, these make up a relatively small number of the comments received by issuers. The average number of comment letters received by an issuer during the SEC review process was four. The average number of comments in the first, second and third comment letters were 23, eight and four, respectively.

SEC hot button comments driven by sector

Certain types of comments have become SEC staff hot buttons for different sectors. For example, from 2014 to 2017, 71% of health care issuers received a cheap stock comment, 72% of TMT issuers received a revenue recognition comment, 47% of industrials issuers received an operating segment comment, and, from 2014 to 2017, 72% and 68% of TMT and E&P issuers, respectively, received a comment requesting back-up support. In the health care sector, cheap stock comments are likely more common given the significant use of equity as a compensation tool and the continuous fundraising activity in which biotech/biopharmaceutical issuers are engaged.

In the TMT sector, revenue recognition comments reflect the complex accounting issues raised by contractual arrangements typical for TMT issuers. Further, we suspect that industrials and consumer issuers are more likely to receive operating segment comments given the potential for these issuers to have multiple discrete business and geographic units.

Multiple class stock structures remain prevalent

There was a significant increase in IPOs by
issuers with multiple class capital stock structures. Approximately 30% of issuers went public with multiple classes of common stock in 2017 as compared to 18% of issuers in 2016. Almost 68%
of these issuers provided for unequal voting rights among classes. The TMT sector has been home to the greatest number of issuers going public with multiple classes of common stock, both in absolute numbers and as a percentage of an overall sector. Two TMT issuers in our study (Snap and Blue Apron) provided for non-voting shares of common stock
in their capital stock structure.

Increase in going-concern issuers, but decrease in issuers with a material weakness

The percentage of issuers with a going-concern qualification increased from 7% in 2014 to 13%
in 2017, compared to a high of 18% in 2015. Interestingly, in both 2016 and 2017, issuers with a going-concern qualification were more likely than issuers without the qualification to price in or above the range. After observing a significant increase in the percentage of issuers disclosing a material weakness in their internal control over financial reporting from 2014 to 2016, we found that the percentage of such issuers declined from 37% in 2016 to 34% in 2017.

As in prior years, we did not observe any discernable negative impact on pricing related to the disclosure of a material weakness in internal controls.

Private placements in lead-up to IPO

We observed that 23% of issuers privately placed equity securities within the twelve months prior to the first submission/filing of their IPO registration statement in 2017. Of these issuers, more than half conducted a private placement within the six months prior to the first submission/filing. Approximately a third of the issuers privately placing securities were from the health care sector and all earlier-stage biotechnology or biopharmaceutical companies.

Year-over-year decrease in insider purchasing

From 2014 to 2017, we saw an increase in insider purchasing in IPOs from 24% in 2014 to 33% in
2017. Both the percentage of IPOs with insider purchasing and the average portion of the overall deal purchased by insiders peaked in 2016 at 42% and 34%, respectively. In 2017, however, there was a slight reversal in the trend with 33% of IPOs including one or more insiders purchasing and, on average, 22% of shares sold in these IPOs being purchased by insiders. Insider purchasing was most prevalent in the health care sector. Over the past four years, 67% of health care deals included insider purchasing, peaking at 81% of health care IPOs in 2017. This compares to 16% over the last four years and 17%
in 2017, respectively, for non-health care issuers.

Decrease in sponsor-backed deals

From 2014 to 2016, sponsor-backed IPOs represented around 45% of the total IPO market.
In 2017, there was a decline in the percentage of sponsor-backed IPOs to a little more than a third
of the IPO market. We noted that sponsor-backed IPOs continue to represent the majority of issuers
in the industrials and consumer/retail sectors. Sponsor-backed IPOs also continue to represent the majority of non-EGC issuers. In 2017 we observed
a continuing trend in the decreasing number and percentage of sponsor-backed IPOs in which a management or termination fee was paid to the sponsor. In 2017, six percent of sponsor-backed IPOs included this feature compared to 14% in 2016 and 32% in 2014.

Consistent percentage of secondary IPOs in market with increase in secondary IPOs with sales by management

In 2017, approximately 26% of IPOs included a secondary component. This percentage has been relatively consistent since 2014 and in line with the four-year average of 24%. IPOs with secondary components were most prevalent in the financial services and consumer/retail sectors and far less prevalent in the health care sector. In addition, in each year since 2014, sponsor-backed IPOs were twice as likely to include a secondary component as compared to non-sponsor backed IPOs. We also noted that there was a significant decrease in the percentage of IPOs with a secondary component that included sales by an issuer’s management team from 36% in 2014 to 25% in 2016. In 2017, however, that percentage bounced back to 36% of IPOs. We found that in 2017, IPOs with a secondary component (including those IPOs that included sales by management) were more likely to price either in or above the range than IPOs without a secondary component.

2018 IPO Market ...

The U.S. IPO market is off to a strong start in 2018, with volumes and proceeds up year-over-year. During the first quarter of 2018, three IPOs priced with base deals over $1 billion which is greater than all of 2017 in the aggregate. In spite of continued volatility in the capital markets, potentially rising interest rates and global geopolitical uncertainties and tensions, the U.S. IPO market is more active than in years past. We’ve also seen a number of global offerings listing in the United States, including 29% of offerings and 49% of base deal value from non-U.S. companies. TMT and health care continue their strong showings, but like 2017, other sectors are also well represented in the overall market.

One of the most anticipated IPOs of the year so far was the non-IPO of Spotify in April 2018. Instead of following the traditional IPO process, Spotify opted for a direct listing on the New York Stock Exchange. No shares were sold by Spotify and no underwriters were utilized to facilitate the resale of shares by existing shareholders. In addition, Spotify’s direct listing was without many of the typical features of an IPO, including an overallotment option and lock-up agreements for existing shareholders, and did not even have an IPO price at which shares were expected to begin trading. On Spotify’s first day of trading, it took a few hours to set a price at which the shares would begin trading (following the establishment of a reference price of $132.00 per share the night before) and the stock opened at $165.90 per share before trading back down to $149.01 per share. Market participants are still considering what to make of Spotify’s direct listing; there are continuing questions about the limited liquidity in Spotify’s shares, what will happen if a significant block of shares hits the public markets and whether the direct listing approach is appropriate for other private companies seeking to enter the public markets.

We hope you enjoy the 2018 IPO Study and welcome your feedback. Please feel free to contact any of our lawyers listed inside the front cover.

Click here to access Proskauer's 2018 IPO Study. 

© 2022 Proskauer Rose LLP. National Law Review, Volume VIII, Number 112

About this Author

Julie Allen, Corporate Attorney, Proskauer Rose Law Firm

Julie’s practice focuses on general corporate and securities matters. She represents both underwriters and issuers in initial public offerings and follow-on equity offerings. Her experience also includes Rule 144A debt offerings, both as counsel to issuers and to initial purchasers. Julie's practice also includes mergers and acquisitions, particularly transactions involving public companies. She represents buyers and sellers, activist stockholders, boards of directors and financial advisors in mergers, acquisitions, recapitalizations and tender offers. Julie also regularly counsels public...

Philippa M Bond, Capital Markets Attorney, Finance Lawyer, Proskauer Rose Law Firm

Pippa Bond is a partner in the Corporate Department and a co-head of the Global Capital Markets Group. She has extensive experience in corporate finance and securities, including leveraged buyouts, acquisitions and restructurings.

Pippa acts as counsel to underwriters, sponsors and issuers in registered public offerings, block trades and private placements of debt and equity securities, as well as tender offers and consent solicitations. Pippa also provides general counseling for institutional and corporate clients with respect to general...

Stuart Bressman, Private Equity Attorney, Capital Markets Lawyer, Proskauer Rose Law Firm

Stuart Bressman is a partner in the Corporate Department and a member of the Capital Markets Group. Stuart focuses on a variety of corporate and capital markets transactions in which he represents both investment banks and issuers in public and private offerings of various kinds of securities by both U.S. and non-U.S. companies. He also advises clients with respect to general corporate and securities compliance and reporting matters.

Stuart has represented both underwriters and issuers in connection with numerous public and private offerings of...

Peter Castellon, Corporate Attorney, Capital Markets Lawyer, Proskauer Rose Law Firm

Peter represents issuers, underwriters and selling shareholders in connection with offerings of securities, including IPOs, follow-on and secondary offerings, block trades, rights offerings and offerings of convertible and exchangeable bonds.

Representative transactions at Proskauer include the following:

  • Representing the underwriters (led by Citi and Jefferies) in connection with the $110m London IPO of Georgia Healthcare Group.

  • Representing Cairn Homes, the Irish home...

Michael J Choate, Real Estate Capital Markets Attorney, Proskauer Rose Law Firm

Michael Choate is a partner in the Corporate Department and is a member of the Real Estate Capital Markets Group. Michael focuses on securities and corporate finance matters including public and private offerings of both equity and debt securities, with an emphasis on Real Estate Investment Trusts (REITs), mergers and acquisitions, corporate governance issues and federal securities compliance matters.

Michael’s representative experience includes:

  • Advising publicly-traded and non-listed REITs in equity and debt...